Clause 17.—(RIGHT TO CARRY BACK LOSS SUSTAINED IN LAST YEAR OF BUSINESS.) (Hansard, 24 June 1954)

§ Mr. Geoffrey Stevens (Portsmouth, Langstone)
I beg to move, in page 15, line 30, after "trade," to insert" profession or vocation."

§ The Chairman
I think it would be convenient if we also discussed the next two Amendments in the hon. Gentleman's name—in page 15, line 34, leave out from "investments," to "shall," in line 39, and insert: the rent of property let arising in that year and the annual value of property charged under Schedule A in respect of that year. and in page 15, line 41, leave out "the said Case I." and insert "Schedule D."

§ Mr. Stevens
This Clause is a small but welcome concession which entitles a business which makes a loss in the last years of its life to carry back that loss, for Income Tax purposes, into the three years preceding the final year of business. It is a small but welcome concession but is somewhat restricted, and I wonder whether my right hon. Friend the Chancellor will look at these three Amendments, in the names of my hon. Friends and myself, which seek to widen the provisions.
Subsection (1) begins by referring to "a trade, profession or vocation." In subsection (3), where effect is given to the intended relief, the reference in line 30 is only to "a trade." To go a little further, we see that the profits against which the loss may be set are limited to the trading profit, interest or dividends, but only the interest or dividends which would fall to be taken into account as trading receipts.
So far as the first Amendment is concerned, although a taxpayer may have several sources of income which for administrative purposes are assessed for taxation under different schedules, he has, 603 in fact, only one income. Although this may be derived from different sources, it seems to me illogical, if he makes a loss in a returnable year from one source of income, that he is restricted to claiming relief against the profits of that particular source of income.
I should be glad if my hon. Friend would look at the matter and see whether it is the Government's intention that relief on losses should be restricted only to the same category of income, and whether he could not consider widening that concession by taking advantage of some of the Amendments which I have placed upon the Order Paper.

§ The Economic Secretary to the Treasury (Mr. R. Maudling)
I am not quite sure that I agree with my hon. Friend the Member for Langstone (Mr. Stevens) about subsection (3). I got the impression from him that he thought that the operative part of the Clause was subsection (3) whereas, of course, the subsection is confined to a very limited class of case indeed. The main part of the Clause is in subsection (1). The purpose of this Clause is to carry out a recommendation of the first Millard Tucker Committee, which was to the effect that business losses should not only be capable of being carried forward against non-business income but should be allowed to be carried back for three years against business income.
Subsection (3) is really a narrow point and it deals only with investment companies. We have in mind the case where the holding of investments is part of the business of a company, and we think that any reasonable business losses in the terminal year should be set off against the investment income in the preceding three years. What my hon. Friend is asking us to do is to extend this to all forms of investment income, and my right hon. Friend does not think he can do that. As my hon. Friend is aware, last year we made a concession on the lines suggested by the Millard Tucker Committee about carrying forward business losses against non-business income for one year.

§ Mr. Stevens
I find this Clause very difficult to follow. My hon. Friend says that subsection (3) is limited to investment companies. Will he point to 604 the words in the subsection which are intended to have that effect?

§ Mr. Maudling
I should have thought that the wording of subsection (3) as a whole indicates that. Subsection (1), which is the operative part of the Clause, says: Where a trade, profession or vocation is permanently discontinued, and any person then carrying it on, either solely or in partnership, has sustained therein a loss to which this section applies (hereinafter referred to as a 'terminal loss'), then subject to the provisions of this section he may claim that the amount of the terminal loss shall, as far as may be, be deducted from or set off against the amount of profits or gains on which he has been charged… If my hon. Friend studies the subsection, he will find that business losses can be carried back against business profits, and business profits under subsection (3) can be taken to include investment income when the business is an investment company. We have already enabled people to carry business losses forward for one year against non-business income, and now we are carrying out another recommendation of the Millard Tucker Committee which has to do with terminal business losses being considered for setoff against income over the preceding three years. We have gone as far as the Committee recommended, and my right hon. Friend does not feel that he would be justified in going beyond the recommendation of the Committee.

§ Mr. Maudling
I beg to move, in page 16, line 7, after "reduced," to insert: by an amount applied in making any payment other than a payment of dividends. The point is again a very narrow one, though I think it is important. In calculating the profits of the preceding years against which terminal losses may be offset, it is clearly right to exclude distributions by way of dividends because the company has not borne the tax but the individual shareholder has done so. Similarly, when computing actual terminal losses, it is clearly right to disregard the amount distributed, because tax has not been paid by the company but by the shareholder who receives the distribution. In both these cases, in the terminal year and in the year against which a loss is being offset, the profit of the company is to be reduced by the amount distributed by way of dividend.
605 It has been represented to my right hon. Friend by certain professional bodies that there is really no reason why distribution made in the intervening years should intervene to prevent terminal losses from being carried back to the preceding year. That is a valid point put forward by the professional bodies, and my right hon. Friend is prepared to accept The purpose of this Amendment is, in fact, to give the effect which I have been describing.

§ Mr. Glenvil Hall (Colne Valley)
I have only one query to put to the Economic Secretary. He did not entirely make clear what other payments the Government have in mind. He made the point about dividends and the fact that the shareholders pay the tax thereon, but what other intervening payments—I think that was the phrase the hon. Gentleman used—has he in mind? I have no doubt whatever that there are such payments, but I wonder whether he could clarify that point before we proceed.

§ Mr. Stevens
Before my hon. Friend answers that question, may I put another one to him? I am a little puzzled by the qualifying word in the line immediately following that in which the Amendment is to be made, where it says: "like reduction." "Like" must clearly be the qualifying word. "Like" normally means the same thing, but I am not quite sure what is intended by the word "like" here. I was wondering whether a better word to use would not be "similar" or "corresponding." I rather think that that would be more what my hon. Friend has in mind. I should be glad if he would look at the point.

§ Mr. Maudling
I will certainly look at it, but I think the word "like" as a matter of art does have the effect which my hon. Friend has in mind. In reply to the right hon. Gentleman the Member for Colne Valley (Mr. Glenvil Hall), I must confess that offhand I cannot quote to him a payment which would be within the meaning of those words. I do not think there are likely to be many.

§ Mr. Glenvil Hall
It is a saving phrase?

§ Mr. Maudling
It is a saving phrase.

§ Mr. Anthony Crosland (Gloucestershire, South)
I beg to move in page 16, line 22, after "sustained," to insert "or profit earned."

§ The Chairman
I think this Amendment should go with the two which follow in lines 26 and 32, also in the name of the hon. Gentleman the Member for Gloucestershire, South (Mr. Crosland) and his friends

§ Mr. Crosland
I agree that the three Amendments have the same object, which is concerned with the concessions made by this Clause.
We on this side of the Committee do not object to the general principle which, as has been pointed out, follows exactly the recommendations of the Millard Tucker Committee. It appears to me to be acceptable that when trading is permanently discontinued the company should be allowed to charge its losses in the last year against the profits of the three previous years. It must be added, however, that it is an entirely new principle for losses to be carried backwards. It has been an accepted principle that losses in one year can be offset against other income in that year, but it is a new principle for those losses to be offset against the previous years' profits
We have no objection to the principle. The point we raise in these three Amendments relates to the terminal loss. We are disturbed at the manner laid down in the Clause for computing it. From the relevant subsection, (5, a and c), it appears that the terminal loss is defined. ignoring for a moment the capital allowances, as the aggregate of two separate sums, the loss sustained in the period up to 6th April of one year and the loss made in the period after 6th April in that year. We could raise no possible objection if losses were made both in period A and period B, so to speak, but we are disturbed at the position if losses were made in one period and a profit was made in the other. That is not at all unlikely to happen, and we want to be quite clear about it.
Suppose that in the 10 months of the terminal period that fell before the end of the accounting year a profit of £4,000 were made, and that in the last two months of the period, after the accounting year, there were a loss of £2,000. Taking the year as a whole, there would be a 607 profit of £2,000, but as the Clause is drafted, there would be a loss of £2,000. That seems a curious result. In arriving at the definition of "terminal loss," the profit made in the first period is ignored, although by any common-sense standard one would set the loss in one part of the year against the profit made in the other part of the year. We should be grateful for some clarification of this point.
There is something to be said for the Clause. We want businesses in low water to be encouraged to take risks so as to diminish the loss, but as the Clause is worded it is unduly vague in its definition of "loss." Our Amendments would define the loss in the last 12 months as gross loss less profits, which might turn what would otherwise he a terminal loss into a terminal profit

§ Mr. Douglas Houghton (Sowerby)
I wonder whether the Chancellor has taken the words of the Tucker Committee's Report too literally in carrying out the recommendation in paragraph 81. The last three lines of that paragraph, printed in heavy type, say: …there should be provision under which the owner of a business may carry back a loss incurred in the last year of business and set it against the assessments on that business for the three preceding years. Subsection (5) translates that recommendation literally in dealing with a terminal loss in the last year of business, which does not necessarily coincide with the financial year. Where the accounting period and the financial year are pretty well coterminous, no complication arises because the cessation takes place in the end of an accounting period and there is no apportionment to be made.
If we take the subsection literally. it says that the terminal loss shall for the purposes of this section be determined by taking the amounts, if any, of the following. I think that is rather vague wording. It says "taking the amounts," but it does not say what to do with them. I assume that when we "take" them we do something with them, and that what we do is add them up. That is the only sense I can make of the subsection. We take the loss sustained in the year of cessation, and the loss, if any, in that part of the last year of trading which falls 608 into the preceding financial year and the corresponding fraction of the capital allowances for that preceding year. As my hon. Friend the Member for Gloucestershire, South (Mr. Crosland) pointed out, that can lead to curious results. If a loss is incurred in the part of the year of trading falling after 5th April and there was a profit in the part before 5th April, we ignore the profit.
Some clarification would be helpful on that matter. When I look at the "Taxation Correspondent" in the "Financial Times" I usually find that what he says is extraordinarily clear. On 2nd June he said: As indicated above, you may have made a profit up to April 5, but that does not mean that you have to deduct it from your loss in the last six months. We are concerned with losses and not with profits. That certainly reads as if there were something to clear up.
The Committee should appreciate, in dealing with this recommendation of the Millard Tucker Committee on terminal losses, that the Chancellor is introducing a new principle for dealing with tax liability in the year of cessation. Up to now, the normal basis of assessment is on profits made in the preceding financial year. In the last year of business it is not on the profits of the preceding year but on the profits of the actual year. We became familiar with all this in connection with the transfer of companies to holding companies who were seeking to get advantage from the change in the basis of assessment in the final year of the old business and the first year of the new business. On cessation the basis of assessment has been the actual profits in the last year of assessment from 6th April in that year to the date of cessation of the business.
But that has been accompanied by another adjustment—the revision of the assessment for the penultimate year. The revision of the preceding year's assessment has taken place in order to put that on the profits of the actual year and not on the profits of the year before that. This is very hard going but, from the nods that I am getting from the Economic Secretary, so far, at least, we are understanding each other. In certain cases where that would produce hardship the taxpayer can ask the Inland Revenue—and I understand that it is almost invariably given as a concession—to revise 609 the assessment for the previous six years in order to ensure that there is no hardship by taking the conventional revision when the business ceases.
The present proposal is quite different from that. When the business ceases in the ordinary way and there is no terminal loss, the basis of assessment will continue as at present and will be on actual profits of the proportion of the concluding year and revision for the penultimate year. But where there is a terminal loss it is not the Income Tax year that becomes material but the last year of the business.
One of the deficiencies in dealing with this complicated business in Committee is that we have no blackboard. It is extraordinarily difficult in a legislative Chamber, when dealing with a very complex matter, that one simply cannot illustrate a point intelligently without a computation and showing the figures. Not even the Chancellor, who is usually most helpful in these matters—

§ Mr. Eric Fletcher (Islington, East)
On a point of order. Surely there is no reason why we should not have a blackboard if we want one.

§ The Chairman
We make speeches here. We do not draw.

§ Mr. Houghton
I had an idea, somehow, that my hon. Friend the Member for Islington, East (Mr. E. Fletcher) was not going to help me.
Perhaps, when he is presenting these very difficult Clauses, the Chancellor would circulate a little aide memoire, if that is not a term of disrepute, and give the Committee some assistance in understanding what is proposed, but there might be constitutional difficulties in the way of doing that because, as we well know, the House of Commons may pass legislation but it is not expected to know what it means. It must not presume to say what it means, either. The courts alone are there to tell us what an Act of Parliament means.
I assure the Committee that there can be considerable doubt as to how the Clause will work out in individual cases. It will certainly produce different results in similar circumstances, according to the interpretation put upon it. The third Amendment which we are discussing in page 16, line 32, perhaps expresses the simple point at issue as clearly as it can 610 be expressed in terms of an Amendment. The Amendment does not propose to alter the basis of the final year of trading. It asks that profits earned in the slice of the final year, either one side of the line or the other, shall be taken into account in reckoning whether there is a terminal loss or not. I hope that my supplement to the remarks of my hon. Friend the Member for Gloucestershire, South puts this point reasonably clearly.

§ Mr. Maudling
This is a fiendishly complicated subject and I am grateful to the hon. Member for Gloucestershire, South (Mr. Crosland) and the hon. Member for Sowerby (Mr. Houghton) for putting the points with such clarity. I shall endeavour to explain to the Committee, and to myself as I go along, what the true position is. If the hon. Member for Sowerby cared to meet me somewhere else with a blackboard, no doubt we could spend a happy time together, probably confusing one another in the process. The Clause, following upon the Millard Tucker recommendations, proposes to allow relief where a business in its last stages has suffered losses which it has not been able to recoup against taxation. It is in accordance with the principle of trying to equate tax liability on the business to the profits earned by the business over its life.
The hon. Member for Sowerby, referring to the interpretation of the recommendation relating to the last three years, asked what was meant by the last year and whether it was the last year of assessment or the last twelve months. I agree that that can be interpreted in one of two ways. We thought it more generous to make it mean over the last twelve months, so that over the last twelve months there should be provision for terminal loss, if it occurs within that twelve months, to be set back against profits of an earlier period. By taking twelve months instead of the last year of assessment, one faces the difficulty which was mentioned by the hon. Member for Gloucestershire, South of period A and period B being respectively before and after the last 6th April within the lifetime of the business.
It may have escaped the attention of hon. Members opposite that it is made quite clear that the loss which is brought within the provisions of the Clause must 611 be a loss not otherwise relieved. Subsection (5) contains the words in brackets: (in so far as they have not been otherwise taken into account so as to reduce or relieve any charge to tax) That means that to qualify for terminal loss relief any loss must not already have been used to reduce other profits of the business. Taking the periods A and B, if there is a profit in both periods, this question does not arise. If there is a loss in period A and a profit in period B, then, by the operation of the words in brackets which I have quoted, the loss in period A cannot be counted as a terminal loss if it has already been used to reduce the total profits in the last year of assessment.
If there is a profit in period A and a loss in period B, then period A will be part of the last year but one of assessment and the profits of that full year of assessment would have been charged already to tax in full. That may have been charged on one of two bases, whichever is the higher—either the actual profits for the penultimate year of business or, if higher, the profits for the ante-penultimate year. If the profits of the penultimate year have been charged on an actual basis, then those profits have already been charged to tax in full and there is no case to bring them in to set back against a terminal loss.
If the charge has been against the profits of the ante-penultimate year there has been a charge to tax on a different basis and one which, normally speaking, is higher. This arrangement can be taken to balance fairly against the fact that in the earlier stages of the life of the company one inevitably has certain periods of profits charged to tax twice. Hon. Members will find that it will work out in reasonable balance over the whole life of the business.
Now let us suppose that we have a loss in period A and a profit in period B. The loss in period A can only be treated as a terminal loss if it has not been used already to reduce the other profits. Therefore, we have the circumstances in period A of a loss not already recouped by the taxpayer and in period B a profit. If we accepted the group of Amendments put forward it would mean that losses in period A might go unrelieved. They might go unrelieved because in some circumstances there might be losses coming 612 from the ante-penultimate year which would absorb all the profits of the last year and leave nothing against which to set losses in period A unless there were terminal loss provisions made.
4.30 p.m.
What is important is that this Clause as it stands, so far as I can see, is calculated to allow the taxpayer suffering a terminal loss to set off that loss against previous profits but not in any circumstances to set off a loss he has already set off against other profits. It will have the effect of adjusting his trading experience over the latter period of the life of the business, but in no circumstances give him greater tax relief than he is entitled to in the period as a whole.
I hope I have been able to convince hon. Members opposite that in fact this Clause provides against the sort of dangers they have in mind and I would ask them to withdraw the Amendments, if they can accept that, while the Clause may not go the full way in ensuring what they want, it goes in that direction.

§ Mr. Hugh Gaitskell (Leeds, South)
We appreciate the great efforts made by the Economic Secretary to instruct us in this matter. I am only sorry to have to say that, as the debate went on, I found myself becoming more and more confused. I thought I understood it when my hon. Friend the Member for Gloucestershire, South (Mr. Crosland) spoke and I became more instructed as my hon. Friend the Member for Sowerby (Mr. Houghton) proceeded, but I got a little behind when the Economic Secretary was in the middle of his speech. I felt that I should have attempted to ask the hon. Gentleman to produce a number of numerical examples at dictation speed so that, although my hon. Friend the Member for Sowerby had no blackboard, he could take down those examples and think them over while I made a speech saying nothing meanwhile.
In a matter of this kind it is extremely hard to be sure whether the points we raise are covered or not. I will be frank with the Committee on that. We have some calculations here which I am tempted to read, but I do not think I will do so. Instead, I will make a proposition. If the Economic Secretary will look at some figures, illustrations and examples that we will hand to him between now and the Report stage, consider 613 whether the point is really covered and. if he realises that there is still a point of substance to be met he will be prepared to do something about it, I think that would meet the wishes of this side of the Committee.
We hope that what the hon. Gentleman said is right and does really meet the point, but quite frankly, so far as I am concerned, I do not think I am sure about it without looking at HANSARD and reading what the hon. Gentleman said. If in the meanwhile he will consider these hypothetical cases which I should like to hand to him in the course of today, perhaps my hon. Friend would he prepared to withdraw the Amendment.

§ Mr. Roy Jenkins (Birmingham, Stechford)
I wonder whether I could put a point to the Economic Secretary before we leave this very complicated matter, which I thought he explained with great lucidity. It is a very complicated point, and therefore I have to put it in a rather unusual way. Let us assume that a company were coming into being with a view at some stage to winding itself up and making a terminal loss. That being so, would there be any advantage in a company choosing a particular date on which to end its financial year if that company had a certain seasonal pattern of trade, or is the Clause as at present drafted—I think the Economic Secretary meant to tell us this—such that companies with a particular seasonal pattern of trade and having their year ending on a particular date, would be put in the position in which they ought to be and would be given no particular advantage by virtue of those two accidents?

§ Mr. Maudling
I shall be very glad indeed to study the examples which the right hon. Member for Leeds, South (Mr. Gaitskell) has promised to furnish, because these are matters on which it is very difficult to be quite certain. At the same time, I will consider the point raised by the hon. Member for Stechford (Mr. Roy Jenkins). I feel that the answer about the seasonal trade is covered by the form which the Clause takes, but whilst considering the examples to be given by the right hon. Member, I will consider that point also.

§ Mr. Houghton
May I ask why it has been thought necessary to modify the existing basis of dealing with cessation cases? This is making life more complicated, 614 even for Inland Revenue officials. The Millard Tucker Committee dealt with the case of a business winding up and making a loss in the final year when it had no way of recouping itself as it had no future profits against which to set off a loss and, as the law was, it was not allowed to set off the loss against previous profits. In many cases the Income Tax assessment over the whole period of the business did not truly reflect the profit yield of the business.
That was a simple complaint. Would it not have been substantially met if the Chancellor had said, "All right, we will still continue the normal basis of dealing with cessation, but where there is a loss in the final year we will set it off against the previous profits"? I feel that the Chancellor has gone rather further to meet this grievance than was perhaps justified—certainly further than many people expected him to go—in superimposing on the normal cessation arrangements this new basis for dealing with final assessment where losses have been made.
It may be that full consideration has been given to that question and this was felt to be the better way of dealing with it. As the Economic Secretary said, it is a somewhat more generous way of dealing with it. Probably I have the same set of figures as my right hon. Friend the Member for Leeds, South (Mr. Gaitskell) and when later on they can be studied, probably the Economic Secretary can also tell us whether he is satisfied that the Clause carries out the intentions and whether it is equitable in all circumstances.

§ Mr. Douglas Jay (Battersea, North)
May I ask the Economic Secretary to elucidate a point which was raised by my hon. Friend the Member for Sowerby (Mr. Houghton) in his first remarks? In subsection (5) the Clause says: The question whether a person has sustained any, and if so what, terminal loss…shall…be determined by taking the amounts, if any, of the following … Then we have paragraphs (a), (b), (c) and (d). My hon. Friend said that he assumed the phrase: shall be determined by taking the amounts if any meant in effect that the loss should be treated as being some of the amounts, in (a), (b), (c) and (d). It would introduce a little more clarity into this jungle if the 615 Economic Secretary could confirm that that is so. If it is so might it be possible for the draftsmen between now and the Report stage to set it out a little less ambiguously?

§ Mr. Maudling
That was the intention. We will certainly consider whether it can be more clearly expressed.

§ Mr. Crosland
I beg to ask leave to withdraw the Amendment.

§ Mr. Maudling
I beg to move, in page 16, line 38, at the end, to insert: and for the purposes of paragraphs (a) and (c) of that subsection the amount of a loss shall, subject to the provisions of this section, be computed in like manner as profits or gains under the provisions of the Income Tax Acts applicable to Cases I and II of Schedule D. This is almost a drafting Amendment. It is to ensure that the terminal loss shall be computed in the same way as a trading profit is computed. This provision will be almost exactly the same as the same provision dealing with the relief on losses to be set against income in subsequent years. This is really a common form insertion in provisions of this kind to ensure that there is no doubt about the method of computation.

§ Mr. F. J. Erroll (Altrincham and Sale)
I am rather puzzled by subsection (4) of this Clause which strikes me as being not quite right, either in practice or in theory. The Clause as a whole gives the right to a business sustaining a loss in its final year to carry back that loss against profits made in the three preceding years. Subsection (4) says, in effect, that the profits against which that loss may be set are not to include any profits distributed by way of dividends.
Dividends can only be paid out of profits earned and appropriately taxed. There is no reference here to capital distribution in any shape or form. A company could scarcely distribute original capital by way of dividends without infringing the Companies Acts. It can distribute a capital profit, provided the tax is not deducted. Therefore, it is clear that if a company distributed a 616 capital profit it is a capital dividend which does not enter into the taxation picture at all, and is irrelevant from this consideration. The only relevant distribution is one made out of previous profits put to reserve and taxed in past years.
I cannot understand why there should be this limitation to the amount of profit against which the loss can be set, namely, the amount of profit retained in the business. This has an important consequence for certain classes of companies when they are about to wind up. Examples which occur to me are companies which exploit mineral deposits of a limited size or companies formed for the purpose of developing an area of land as an housing estate or a trading estate.
In either case, the company would be well aware that it was nearing the end of its mineral resources or the land available for development. In its last year there will probably be a loss because some expenditure is bound to run on, although the main purpose of the company has already ended. The company may have ample past profits put to reserve and there may be no logical reason why it should not go on distributing a dividend. But if it does so in the last three years the profits against which the loss can be set will be diminished by the amount of the dividend so paid.
On the other hand, if, with this tax position in view, the company decides to make no distribution, all that happens is that the same amount of money will be distributed on the winding up, and will carry no tax penalty at all. It seems to me, putting it at its lowest, somewhat anomalous that a company which suddenly ceases the payment of a dividend over the last three years prior to winding up should receive a substantial benefit on winding up when the logical thing would be to continue on a reasonable scale the dividend paid during the life of the company; and that this should be allowed to set off the final loss against both retained profits and the dividend paid in the past three years.
I do not expect the Economic Secretary to give me a full reply now, but if he would indicate that he will look into this matter we might be able to arrive at a clearer understanding of it on Report.

§ Mr. Maudling
I will examine with care, as I always do, any point raised by my hon. Friend, but, in principle, this is clear. This provision is to enable companies to obtain relief against taxation which they have paid, and, therefore, it would not be appropriate to give to companies relief in respect of taxation which they themselves have not paid. In the case of distributed profits the taxation upon them falls on the shareholders and not on the company.